Crafting an Effective Letter of Explanation
When your credit, employment or other financial history has some questionable gaps, your lender may ask you to provide a letter of explanation for each. Writing the letter can be tedious, but borrowers would be keen to take advantage of a moment to explain any collections, salary changes, employment lags etc. that might otherwise have held them back from getting a mortgage.
Constructing the letter
Remember to be as specific as possible, and do not try to push details under the rug by being vague. The more straightforward you are, the better. Title each incident in the letter just as you see it on your credit report or just as it happened, e.g.:
Medical Collections from ABC Collection Agency 2/24/14 $234.76
Employment gap 2/20/2013 – 6/14/2013
Go on to describe what happened, and why it happened. If you missed your medical bill payment because you could not afford it, say so. You will only muddy the waters by making comments like “I forgot.” And if it was an error on behalf of the insurance company, provide any evidence supporting your claims.
Evidence can be anything from a divorce decree, child support court order, note from an employer or doctor – any supporting documentation depending on the issue at hand and details of your letter. End each paragraph describing how the issue was resolved, and why it will not happen again. For instance, if you spoke with your insurance company and made any adjustments to how your medical bills were being handled and from that point on every payment has been smooth, it’s worth briefly mentioning.
After all of your details are explained, make sure to end the letter with any information that will reassure the lender you’re ready for a mortgage. If you’ve been making on-time payments for a full year, your credit score has grown, etc., make sure it’s loud and clear. A couple of slip-ups that have been resolved will not necessarily be the end of your home loan.